While homeowners often gripe that their property taxes are too costly, there may be some societal benefit beyond the schools and other services they provide: Higher tax rates might help lower the cost of entry for young people looking to buy their first house.
That's the idea advanced in a recent study published by the Minneapolis Federal Reserve Bank that compared California, which has low property taxes and high prices, to Texas, which has the opposite. If cities and towns in the Golden State were to raise their taxes substantially, it would lead many older homeowners to sell their homes, according to the study. That would add to the housing supply, leading to lower prices for younger people looking to buy.
California’s property taxes are kept low by Proposition 13, a ballot measure voters approved in 1978 that limits how much cities can raise rates in a given year. As a result, the state’s property taxes rank 34th among the 50 states, according to the Tax Foundation. Texas, where these taxes are more critical for government to function because there’s no state income tax, ranks seventh. On the other hand, California's median single-family home cost nearly $900,000 in October, compared to about $350,000 in Texas.
In California, an effect of low taxes is that older people tend to stay in their homes well past the age of 50, even though their children have moved out and they have more bedrooms than they need, the study found. Young people looking to start families could use that space, but they can’t afford the limited number of houses for sale that would suit them. By contrast, in Texas where taxes are high, people are more likely to sell their homes after age 50.
From the Homes.com blog: Are you too young to buy a house?
“The idea of Proposition 13 was to help all the older people not to have such a big tax burden. But the problem is that taxes play a big role in making housing affordable for the young,” Abdoulaye Ndiaye, an economist at New York University’s Stern School of Business, said in an interview. He co-authored the study with three colleagues at NYU and the University of Hamburg.
Not everyone agrees with the conclusions of the study. Raising property taxes won't necessarily lead to much lower prices and draw younger Texans to California, said Andrey Yushkov, a senior policy analyst for the Tax Foundation. And he said it will cause more problems for already overburdened California homeowners.
Increased tax burden
"Such a change would likely exacerbate the state's already high overall tax burden, which is significantly higher than in Texas and other states with no or low-rate income taxes," he said.
Even so, doubling property tax rates in California would lead to a 20% decline in housing prices, the study said. It would also result in a more than 7 percent increase in homeownership among people aged 25 to 44, and a nearly 5 percent increase overall, the study said.
High property taxes are a motivator for older homeowners to sell their properties; they’re more likely to have paid off most or all of their mortgages, so taxes are more important to them. Younger people looking to buy a home have the income to pay the higher taxes, but often lack the wealth to cover a hefty down payment.
Higher taxes (and lower home prices) in California would also encourage some young people in Texas to migrate west for jobs they couldn’t take otherwise, the study found.
“People might not be big fans of the higher taxes, but the effect for the young is beneficial,” Ndiaye said.
Though the study suggests Texas’ high property taxes could act as a check on housing prices, legislators in that state recently considered a proposal to eliminate property taxes altogether because of the burden they place on homeowners.